Is the current U.S. fiat economy sustainable?
Debt backed by debt backed by debt......

The problem is not that money is created or destroyed to satisfy economic activity. The problem is that interest is charged on the non-reserve portion and that is not re-imbursed or otherwise removed from the profits on the balance sheets of the banks. They get the benefit of increased economic activity and we pay for it, at interest.

It's similar to money laundering where a business lends to a second business but both have the same owner. One business shows a minus on its ledger while the other shows a plus but the net result to the owner is zero. Banks are part of the federal reserve system. The net in fractional reserve creation is zero - it is an accounting measure to respond to demand.

As long as demand is the cause of money creation there is no problem. When the basic laws of supply and demand are tampered with - as in the run-up to the housing collapse where demand was falsely created - then there is a problem with excess money creation having been deposited in depreciating assets. The net between the Federal Reserve and the banks gets out of whack.

True. It's amazing how the Fed has to play a delicate balancing act of keeping our paranoia in check. Take below, for example, with respect to the total $ amount of US currency in the world!

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How much actual money is there in the world?
BY JOSH CLARK & KATHRYN WHITBOURNE

How do you count the entire world's money supply? One nation at a time.

To make this question answerable in a finite amount of time, let's simplify things and ask, "How much money is there in actual United States dollars?" Since the statistics for the U.S. are easy to come by, we can examine this question in a couple of different ways.

The first way to look at it might be, "How much cash is there in U.S. currency?" If you took all the bills and coins floating around today in the world and added them all up, how much money would you have? All of that hard and easily liquidated currency is known as the M0 money supply. This includes the bills and coins in people's pockets and mattresses, the money on hand in bank vaults and all of the deposits those banks have at reserve banks [source: Hamilton].

According to the Federal Reserve, there was $1.2 trillion in the M0 supply stream as of July 2013 [source: Federal Reserve Bank of New York]. That sounds like an incredible amount, but think about it this way: According to the CIA, there were 316,668,567 Americans alive that month [source: CIA]. If you took all the cash and divided it up equally, each person should have about $3,800 in cash on them (or stuffed under the mattress).

WOW! This doesn't even account for the mega-multinational corporations who hoard enormous sums of cash as well.

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Obviously, there's some money missing, but there's an easy explanation for that: The Federal Reserve says that at any given time, between one-half and two-thirds of the M0 money stock of U.S. dollars is held overseas [source: Federal Reserve].

The rest of the money is in bank accounts of various types, and the Federal Reserve has tracked these funds in three different values known as the M1, M2 and M3 money supplies. (M3 has since been dropped. More on that below.)

M1 represents all of the currency in the M0 money supply, plus all of the money held in checking accounts and other checkable accounts, as well as all of the money in travelers' checks. In June 2013, the M1 money supply for U.S. dollars equaled about $2.5 trillion [source: Federal Reserve].

M2 is the M1 supply, plus all of the money held in money market funds, savings accounts and CDs under $100,000. In June 2013, the M2 money supply was about $10.5 trillion [source: Federal Reserve].

M3 is M2 plus larger CDs. As of March 2006, the Fed stopped tracking the M3 money stock as an economic indicator because it felt it did not add any information on economic activity that was not already available from M2 [sources: Federal Reserve, Federal Reserve Bank of New York].

All told, anyone looking for all of the U.S. dollars in the world in July 2013 could expect to find approximately $10.5 trillion in existence, using the M2 money supply definition. If you just want to count actual notes and coins, there are about U.S. $1.2 trillion floating around the globe.

Even though the Fed can't say precisely where all the U.S. dollars are in the world, it does try to keep track of how much exists. Find out why it's so difficult to track exactly how much money exists in the world on the next page.

I can't even imagine how nervous the Federal Reserve was in 2008 when everyone wanted more than $3,800 in physical cash under their mattress. A bank run is one of a central banker's worst nightmare. It must cure the paranoia before it spreads like wildfire and soaks up all of the liquidity in the marketplace.